Reverse Charge Mechanism Under VAT in the UAE

The reverse charge is a very common approach across all VAT or GST tax regimes worldwide and is also commonly known as self-assessed or offset tax. Reverse charging of VAT is required when you receive an item that has no tax on it but VAT is due.

For Example, when goods are imported into the UAE, the place of supply is UAE. According to this logic the exporter should pay VAT, however the exporter is not registered in the UAE. So, in this case the importer must consider it as its own VAT output and claim it back in the VAT input. Reverse Charge Mechanism simply increases both the VAT input & output by the same amount, and thus has no change to the amount of net-VAT paid in the VAT return (except in certain rare occasions).

There is an exception to this rule, if the goods imported with the intention of exporting to another GCC state, then the importer must pay import VAT and cannot claim the input VAT. Here the reverse charge mechanism does not apply.

The most common way of setting up the reverse charge mechanism is to use Offset Tax. This works by creating a tax with the type of ‘Offset’. You can also set your reverse charge taxes up by using the ‘Self Assessed.’

In this mechanism the responsibility for a VAT transaction will be shifted from the seller to the buyer, The buyer will reports the Input VAT (VAT on purchases) as well as the output VAT (VAT on sales) in their VAT return for same quarter.

The reverse charge is the amount of Value Added Tax (VAT) would have paid on that goods or services if one had bought it in the UAE. The importer will be disclosing the amount of VAT under both Input VAT as well as Output VAT categories of the VAT return of that quarter.

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